T. Rowe Price Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2009. The company earns most revenue from investment advisory services; fees depend substantially on assets under management and market values.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Total revenue | $443.5 million | $587.7 million | $829.2 million | $1,148.1 million |
| Net revenue | $442.2 million | $586.5 million | $826.7 million | $1,145.6 million |
| Net operating income | $153.9 million | $258.6 million | $264.5 million | $488.7 million |
| Net income | $100.0 million | $162.2 million | $148.2 million | $313.7 million |
| Diluted EPS | $0.38 | $0.59 | $0.57 | $1.15 |
| Operating margin | 34.8% | Not stated | 32.0% | 42.7% |
- Q2 investment advisory fees fell 27% to $360.3 million; average AUM declined to $301.4 billion from $400.0 billion. The average annualized advisory fee rate decreased to 47.9 basis points from 49.8.
- Operating expenses declined 12% in Q2 to $288.3 million and more than 14% in the first half to $562.2 million, reflecting lower compensation, advertising, and other costs.
- First-half non-operating investment activity was a $28.1 million loss, versus $22.1 million income a year earlier, primarily due to $36.1 million of other-than-temporary impairments on sponsored mutual fund investments.
Assets, cash flow, and liquidity
- AUM ended June at $315.6 billion, up 14.2% from year-end and 17.4% from March 31. First-half net inflows were $8.0 billion; market valuation changes and income added $31.3 billion.
- Six-month operating cash flow was $269.8 million, compared with $453.2 million in 2008. Investing activities used $64.5 million and financing activities used $157.0 million. Cash and cash equivalents increased $48.3 million to $667.4 million.
- At June 30, total assets were $2.956 billion, total liabilities $376.3 million, and stockholders’ equity $2.580 billion. The company stated it had no debt. Cash and mutual fund investments exceeded $1.2 billion; management said it had substantial liquidity and did not maintain external liquidity facilities.
- Dividends declared were $0.25 per share for Q2 and $0.50 per share for the first half. First-half dividends paid were $128.0 million.
Material changes and management outlook
- The market recovery beginning in March supported a $43.3 billion increase in AUM from market valuation changes and income during Q2, while net inflows also continued. Nonetheless, average AUM and advisory revenues remained materially below 2008 levels.
- Management said market conditions could mean lower Q3 2009 advisory fees than in Q3 2008. It expected the second half of 2009 to remain challenging, while expressing hope for a gradual return to financial stability and global growth.
- Cost actions included a workforce reduction of 288 associates; headcount was down 9.5% from the start of the year. Management estimated up to $115 million in 2009 operating expense reductions versus 2008, and approximately $17 million of net savings over the next four quarters from the workforce reduction. Full-year advertising expense was expected to be about 25% below 2008; 2009 property and equipment spending was estimated at about $170 million.
- Management estimated a 37.9% full-year 2009 effective tax rate. Capital expenditures were expected to be funded from cash balances.
Risks, contingencies, and unusual items
- Results are sensitive to financial markets, AUM composition, investor flows and sentiment, investment performance, fee levels, competition, and the ability to retain advisory mandates. Regulatory and compliance changes, operating disruptions, and expense variability are also identified risks.
- Management said future impairment charges or realized gains and losses on mutual fund holdings could vary with market performance. Savings-bank debt securities had $2.1 million of unrealized losses, which management considered temporary and expected to recover without forced sale.
- Ordinary-course claims, including employment matters, were disclosed; management considered a material adverse outcome remote. The filing reported no material change in the risk factors from the 2008 Form 10-K.
- The interim statements were reviewed by KPMG, not audited; the review reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- Subsequent AUM, investor flows, market levels, and advisory fee rates, given the company’s dependence on assets under management.
- Whether cost reductions and stated savings are realized, and their effects on service levels, growth, and operating margins.
- Future impairment recognition or realized investment losses, including performance of sponsored mutual fund holdings.
- Actual capital spending, dividend payments, and the company’s continued debt-free and liquid position.
- Whether the expected Q3 fee pressure and full-year tax-rate estimate align with reported results.